1. AS-15 (REVISED) EMPLOYEE BENEFITS
12/10/2017
AS-15 (REVISED) EMPLOYEE BENEFITS
CA Mehul Rasesh Shah
Sunday, December 10, 2017

2. EMPLOYEE BENEFITS
Employee benefits are all forms of Consideration given by an enterprise directly to the employee or their spouses, children or other dependants, to other such as trust, insurance companies in exchange of service rendered by employee.
It is necessary that there is employer-employee relationship (all forms) for determination of any benefits.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

3. Employee Benefits includes following:- 1. Short Term Employee Benefits
2. Post- Employment Benefits
3. Long Term Employee Benefits
4. Termination Benefits
CA Mehul Rasesh Shah
Sunday, December 10, 2017

4. SHORT TERM EMPLOYEE BENEFITS
Short Term Employee Benefits include following:-
Wages, Salaries and Social Security Contribution.
Short Term Compensated Absences (Paid Leave)
Profit-sharing and bonuses
Non-monetary benefits like medical care, housing, Car, free goods and services etc.
NOTES :- Payable within 12 months
SHORT TERM EMPLOYEE BENEFITS
CA Mehul Rasesh Shah
Sunday, December 10, 2017

5. RECOGNITION AND MEASUREMENT
Short-Term Employee Benefits like wages, salaries etc. are recognized as expenses when services in relation to them is provided by employee.
Undiscounted amount payable to Employee as Salary or wages is recognized as liability if the amount of ST Benefits exceeds the amount actually paid.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

6. Short term Compensated Absences
Accumulating Compensated Absences
Carried forward and used in future periods if the current period’s entitlement is not used in full.
May be either-
(a) vesting (i.e. employees are entitled to a cash payment for unused entitlement on leaving the enterprise) or
(b) non-vesting (when employees are not entitled to a cash payment for unused entitlement on leaving.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

7. Short term Compensated Absences
Non-Accumulating Compensated Absences
Not carried forward
Lapse if the current period’s entitlement is not used in full.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

8. Principles for recognition & measurement of Short-term Compensated Absences
Type of Compensated ABSENCES
Time of Recognition
Accumulating
When the employees render service that increases their entitlement to future compensated absences.
Non-Accumulating
When the absences occur.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

9. Example of Accumulating Compensated Absences
Suppose XYZ Ltd. has 1000 employees. Total leave allowed is 20 day and short leave taken can be carried forward for 1 year. In year ended on , 100 employees have 2 days leave carried forward i.e. total day leave carried forward to be used in next year. Company from past records estimates that only 25% of employee use their leave in next year. Thus, Company will have to pay for 50 day leave (i.e. 25% of 200 days leave) for year ending which was unutilized leave of Thus, Undiscounted liability to extend of 50 days leave pay should be recognized as liability in the year itself.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

10. RECOGNITION AND MEASUREMENT for PROFIT SHARING AND BONUSES
Profit Sharing and bonus should be recognized only if
a. there is present obligation to pay on basis of past
events.
b. the amount to be paid can be reliably estimated.
Present Obligation means that company has no alternative but to make payment.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

11. Example on profit sharing & bonus plan
Suppose a profit sharing plan of a company requires to pay 5% of it’s net profit to employees who serve throughout the year. What is the Accounting treatment if say 20% of it’s employee leave during the year?
The company should recognize Proportionate 4% ( i.e. 5% of 80% ) of it’s net profit as liability & Expenses in it’s financial statement.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

12. POST EMPLOYMENT BENEFITS
Defined Contribution plan
Provident Fund
Insured Plan
Defined Benefit plan
Gratuity
Pension
CA Mehul Rasesh Shah
Sunday, December 10, 2017

13. Defined Contribution Plan
In Defined Contribution Plan, investment risk is to be borne by employee and not the enterprise.
The accounting is relatively simple as the total contribution to be made by enterprise is recognized as liability. If contribution actually made is in excess of required contribution, then it is treated as asset.
The total contribution to be made by enterprise for services rendered by employee is recognized as expense when service is rendered.
Sunday, December 10, 2017Sunday, December 10, 2017
CA Mehul Rasesh Shah

14. Multi-employer Plans
Participation of two or more unrelated employee by creating independent entity e.g., Trust.
All the participating is usually administrated by a board of trustee
All the participating employers contribute in trust/plan for the post employment benefit of their employees.
No segregation of assets in a particular employer’s account.
Generally multi-employer plan are defined contribution plan, accounting is done accordingly.
Periodical contribution paid by the employer in multiemployer plan is debited in expense account and credited in Bank account.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

15. State Plans
Established by legislation to cover all enterprises of a specific industry.
Operated by national or local Government.
Provident Fund administrated by the Govt. of India.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

16. Insured Benefits
An employer takes insurance policy from an insurance company for meeting its obligation under post-employment benefits.
Employer has no obligation to pay benefits to the employee.
The insurer has sole responsibility for paying the post-employment benefits.
The payments of fixed premium under such contract are, in substance, the settlement of the employee benefit obligation.
Therefore, enterprises treat such payment as contribution to defined contribution plan.
However if employer enterprise has to pay employee benefits when they fall due; if insurer does not pay, such plan shall be treated as defined benefit plan and not defined contribution plan and accounting shall be done accordingly.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

17. Defined Benefit Plan
In Defined Benefit plan, investment risk and actuarial risk is to be borne by enterprise.
The accounting is relatively complex because of actuarial valuation of liability and estimation of various variables to determine the amount of liability.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

18. RECOGNITION & MEASUREMENT FOR DEFINED BENEFIT PLAN
Liability in Defined Benefit Plan is determined by Actuarial Valuation.
The liability is shown net of Fair Value of Plan Assets.
The net liability is determined as follows:-
Benefit Obligations
Less:- Fair Value of Plan Assets
____
Net Liability in Balance Sheet ____
CA Mehul Rasesh Shah
Sunday, December 10, 2017

19. Benefit Obligations
The benefit obligations on present date is determined by Actuarial Valuations done by recognized actuaries considering various factors affecting the liability in future.
The benefit obligations is determined in every accounting period on basis of following factors:-
1. No. of year of services to be rendered by employee
2. Today’s Salary and expected increase in Salary
in future period.
3. Average age of employees and age of retirement of employees.
4. Employee turnover rate (i.e. attrition rate)
5. Discount factor to give effect of value of money to determine present liability etc.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

20. Fair Value of Plan Asset
Plan Asset is asset in which the contribution of employer is invested in. Fair value of plan assets is determined in accounting period.
Fair value of plan assets is reduced from liability of benefit obligations.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

21. CHARGE OF EXPENSES for COST OF DEFINED BENEFIT PLAN
The following amount is charged as expenses in Profit & Loss Account for cost of defined benefit plan:
1. Current Service Cost
2. Interest Cost
3. Actuarial Gain/(Loss)
4. Past Service Cost
5. Effect of Curtailment
6. Expected return on plan assets
CA Mehul Rasesh Shah
Sunday, December 10, 2017

22. CHARGE OF EXPENSES
Current Service Cost is the increase in PV of cost of defined benefit obligation resulting from service rendered by employee in current period.
To determine PV of Defined Benefit Obligation, related Current Service Cost, Past service cost (where applicable), Projected Unit Credit Method is used. Under this method, each period of service is considered to give rise to an additional unit of benefit entitlement and is measured separately to build up the final obligation.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

23. CHARGE OF EXPENSES
Interest Cost is amount of interest computed by multiplying the Discount Rate (determined by reference to market yield at the balance sheet date on govt. bonds) at the start of the period by the PV of the Defined Benefit Obligation at the start of the period.
In other words, Interest cost is the increase in the pension liability arising from the unwinding of the discount as the liability is one period nearer to being settled.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

24. CHARGE OF EXPENSES
Actuarial Gain/(loss) is immediately recognized as income or expenses in Profit & Loss Account.
Arising from increase or decrease in either the PV of the defined Benefit Obligation or the Fair value of Plan Assets.
Causes are:
High/Low rates of Labour Turnover, early retirement, mortality, change in salaries,etc.
Changes in discount rate and
Difference between actual return on plan asset and expected return on plan asset.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

25. CHARGE OF EXPENSES
Past Service Cost is cost attributable to past year services rendered due to change in actuarial assumptions having effect in past period. Past service cost is recognized over a period of vesting time.
Expected Return on Plan assets is determined by finding expected return on Opening Fair Value of Plan asset and is reduced from total amount expensed.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

26. Return on Plan Assets
The return on plan asset is interest, dividends and other revenue derived from the plan assets, together with realized and unrealized gains or losses on the plan assets, less any costs of administrating the plan.
In respect of defined benefit plan; expenses recognised in the statement of profit and loss are net of expected return on plan asset.
The difference between
the expected return on plan assets and
the actual return on plan assets
is actuarial gain or loss. .
CA Mehul Rasesh Shah
Sunday, December 10, 2017

27. Return on Plan Assets
Actual return on plan asset= Fair value of plan asset at the end - Fair Value of Plan asset at the beginning - Contribution received by plan + Benefits paid out of the plan asset during the year.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

28. Answer of Example Return on Rs. 10,000 held for 12 months at 10.25%
1,025
Return on Rs. 3,000 held for six months at 5% (equivalent to 10.25% annually, compounded every six months)
150
Expected return on plan assets for 2006
1,175
Fair value of plan assets at 31 December, 2006
15,000
Less Fair value of plan assets at 1 January, 2006
(10,000)
Less contributions received
(4,900)
Add benefits paid
1,900
Actual return on plan assets
2,000
CA Mehul Rasesh Shah
Sunday, December 10, 2017

29. The difference between the expected return on plan assets (Rs
The difference between the expected return on plan assets (Rs. 1,175) and the actual return on plan assets (Rs.2,000) is an actuarial gain of Rs Therefore, the net actuarial gain of Rs. 765 [Rs Rs. 60 (actuarial loss on the obligation)] would be recognised in the statement of profit and loss the expected return on plan asset for next year i.e., will be based on market expectation on for return over the entire life of the obligation.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

30. Curtailments and Settlements
Curtailment - Enterprise
has a present obligation, arising from the requirement of a statute/regulator or otherwise, to make a material reduction in the number of employees covered by a plan; or
Change the terms of a defined benefit plan such that current employees will no longer qualify for benefits, or will qualify only for reduced benefits.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

31. Curtailments and Settlements
A settlement occurs when an enterprise enters into a transaction that eliminates all further obligations under a defined benefit plan. For example, when a lump sum cash payment is made to, or on behalf of, plan participants in exchange for their rights to receive specified post-employment benefits.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

32. The gain or loss on a curtailment or settlement should comprise:
An enterprise should recognize gains or losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs.
The gain or loss on a curtailment or settlement should comprise:
Any resulting change in the present value of the defined benefit obligation;
Any resulting change in the fair value of the plan assets;
Any related past service cost that had not previously been recognised relating to curtailment and settlement.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

33. Example on Curtailments
An enterprise discontinues a business segment and employees of the discounted segment will earn no further benefits. This is a curtailment without a settlement. Using current actuarial assumptions (including current market interest rates and other current market prices) immediately before the curtailment, the enterprise has a defined benefit obligation with a net present value of Rs. 1,000 and plan assets with a fair value of Rs. 820 and unrecognized past service cost of Rs. 50. The curtailment reduces the net present value of the obligation by Rs. 100 to Rs. 900.
Of the previously unrecognised past service cost, 10% relates to the part of the obligation that was eliminated through the curtailment. Therefore, the effect of the curtailment is as follows:
CA Mehul Rasesh Shah
Sunday, December 10, 2017

34. Net Present value of obligation 1,000 (100) 900
Before Curtailment
Curtailment Gain
After Curtailment
Net Present value of obligation
1,000
(100)
900
Fair value of plan assets
(820) -
180 80
Unrecognised past service cost
(50) 5
(45)
Net liability recognised in balance sheet
130
(95) 35
CA Mehul Rasesh Shah
Sunday, December 10, 2017

35. EXAMPLE OF POST EMPLOYMENT BENEFIT COST
Benefit attributed to current year (Rs.)
Total Benefit attributed
Discount Rate (%) % % %
Op Benefit Obligation (Note 1)
Interest Cost at 10 %
Current Service Cost (Note 2)
Closing Benefit
As per Actuary
Actuarial Gain/(loss) (5) (7)
Benefit obligations
Note 1: Op. Benefit Obligation is PV of Benefit attributed to prior years.
Note 2: Current Service Cost is PV of Benefit attributed to current year.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

36. EXAMPLE (CONTD…) 2007 2008 2009 PLAN ASSETS
PLAN ASSETS
Op. FV of Plan Asset
Contribution made
Benefits Paid
Actual Return (Balance)
Closing Fair Value
Expected Return
Actuarial gain/(loss) (1) (3) (2)
CA Mehul Rasesh Shah
Sunday, December 10, 2017

37. EXAMPLE (CONTD…) Amount Shown in Balance Sheet 2007 2008 2009
Benefit Obligations
Less:- Fair Value of P.A. (70) (155) (250)
Net Liability/(Asset)
CA Mehul Rasesh Shah
Sunday, December 10, 2017

38. EXAMPLE (CONTD…) Amount Expensed in P&L Account 2007 2008 2009
Current Service Cost
Interest Cost
Actuarial (gain)/loss (23)
Less: Expected Return (11) (28) (42)
Expensed to P&L
CA Mehul Rasesh Shah
Sunday, December 10, 2017

39. OTHER LONG TERM BENEFITS
Long Term Employee Benefits include:-
1. Long Term Compensated Absences
2. Jubilee or Other Long Term benefits
3. Long Term Disability Benefits
4. Profit Sharing and Bonus payable after 12 months.
Accounting:-
Accounting of long term benefits is similar to post employment benefits except that Past Service Cost is expensed out immediately.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

40. TERMINATION BENEFITS
Termination Benefits are employee benefits payable as a result of termination of employment before the normal date of retirement date.
The expenses of termination benefits are to be recognized immediately if-
1. There is present obligation as a result of past events.
2. The amount payable can be determined reliably.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

41. ACTUARIAL ASSUMPTIONS
Under Defined Benefit Plan, actuary’s valuation is most important to determine the financial statement impact.
Thus, management and auditor relying on his valuation of liability must thoroughly go through the assumptions made for valuation. It has to be ensured by management that data used by actuary and various assumptions made by him are reasonable having regard to nature of business and industry of the company. It has to be ensured that assumption are in line those taken by peer companies in similar industry.
CA Mehul Rasesh Shah
Sunday, December 10, 2017

42. INFORMAL PRACTICES
AS-15 (Revised) provides for recognition of employee benefits arising out of informal practices which gives rise to present obligation to pay employee benefit.
Informal Practice Eg. Lump sum payment on festivals, festive occasion for employee, parties for employee.
Historical pattern of expenses should be considered to determine cost of such benefits and also impact on employees if these benefits are not given should be considered.
CA Mehul Rasesh Shah
Sunday, December 10, 2017